One star economist who understood Obamacare

Thursday , March 06, 2014 - 10:04 AM

Amity Shlaes

NEW YORK — It is sad, but telling, that the economist James Buchanan died just as Congress was finishing up the details of its budget deal. Or, for that matter, that this 93-year-old Nobel Memorial Prize winner left us just as the United States entered the stage of enforcement of its new health-care law.

Almost everyone involved in the budget deal agrees that it is more a product of interest groups than a principled construct. The same can be said for Obamacare.

More than any of the rest of America’s great modern economists, Buchanan stressed the primacy of interest groups. Interest groups, he said, rather than ideas or even men, shape our modern political and economic life. High-minded politicians might speak of “the public interest,” and claim a special authority over the rest for their work. As Buchanan and his colleagues showed, a public interest is often just another special interest in disguise.

The economic school he founded, known as public-choice theory, casts a skeptical eye on government officials and bureaucrats and points out that their work might serve the public less than a very private enterprise.

I have always wondered whether Buchanan turned to the study of sanctimonious government officials and their interests because he spent time in graduate school on the South Side of Chicago in the late 1940s (the neighborhood where I was later born). Hyde Park was lively, but uneven. Little shops along 55th Street, just north of the university, might thrive, but poor black migrants crowded together in apartments with insufficient heat during the city’s tough winters.

Buchanan earned his doctorate in 1948, about the time the politicians and other civic leaders promised that bulldozing large swaths of the neighborhood and creating new public-private projects would yield a better Hyde Park, prettier and more racially integrated.

But the result felt wrong, especially to residents. The new apartment buildings, in the minimalist international style, themselves felt as cold as winter. Instead of bringing people together, they separated them: One complex quickly became known as Monoxide Island. With the stores gone, there was less life on the streets. Yet Hyde Park locals lacked the vocabulary to criticize the transformation we had been told was progress or reform. Who wants to be construed as “pro-slum”?

Buchanan supplied that vocabulary. Instead of calling urban renewal “reform,” as the officials did, he called it “politics.” It was important, he said, that all such projects, whether urban renewal in Chicago or elsewhere, be viewed honestly, that we look at “politics without romance.”

The housing redevelopment in Hyde Park worked to the advantage of certain interest groups, political or business. Yet the high-and-mighty tone of the anti-slum language masked something. No party involved was any better or any worse than anyone else: They were all pursuing their own interests. Politicians often promoted such ugly ambitious projects not because the projects were good. They did so because the projects enabled politicians to award contracts to important campaign donors.

Buchanan spent his early years as a professional in the days of high economics, when math and Keynesianism were celebrated. No one challenged economists. They represented another kind of virtue, that of the intellectual. Buchanan was different. He challenged his fellow scholars the same way one challenged politicians.

One should force them to realize their economics might possibly be serving as window dressing for a political agenda: “What model of politics are you assuming before you start talking about what’s good taxation? What’s good spending? I called for them to clarify their assumptions of politics,” he later explained in an interview with the Minneapolis Federal Reserve Bank.

Nothing outrages the sanctimonious more than being unmasked as just as greedy as the rest. At the University of Virginia, where he later taught, Buchanan’s frank analysis irked colleagues. A paper commenting on the squabbles noted that the university perhaps thought Buchanan’s unromantic view of political reforms might not fit in at Virginia, which “with its ties to the Kennedy family, has been close to the liberal establishment.”

Buchanan’s common sense conflicted with the self- righteousness of the Kennedys. Virginia could not stand it. The professor moved on.

I first encountered Buchanan’s work when I asked him in a phone interview whether “pro-business” tax breaks were actually good for the economy. He took much time pointing out that Big Business wasn’t the same as the free market. Buchanan had spent a year studying in Italy and looking at the work of left-leaning economists, indeed some Marxists, who criticized the corruption of Italy’s republic before Benito Mussolini.

He faxed me, for those were the days of the fax, dozens of pages of the work of Amilcare Puviani, an Italian scholar. The pages were in Italian and curled up on my desk unread. Buchanan, who was already a Nobel laureate, didn’t relent: He translated over the phone for me. The main idea he conveyed was that hidden taxes served a pernicious purpose: They tricked taxpayers into thinking they were paying less than they did, and therefore also thinking that government could spend more and tax more.

I soon found that public-choice theory explained everything: Parkinson’s Law, the tendency of bureaucracy to create more work for itself. Health officials’ interests in testing small children’s blood for lead made sense when one considered that finding poisoned children validated their jobs.

Those of us who had the luck to know Buchanan will remember his generosity. He exposed arrogance, while eschewing it himself. He was a paradox: The man who studied selfish interests also sacrificed his own.

Amity Shlaes is a Bloomberg View columnist and the director of the Four Percent Growth Project at the Bush Institute. Her biography “Coolidge” will be published in February.